Read reports of ‘averages’ carefully
I have three coworkers with whom I most closely work. Today we got on the subject of credit card debt. Three of us have no credit card debt; the fourth has $12,000 in debt. I pointed out that, on average, we each have $3,000 in credit card debt. The median for three of us, however, is zero.
This little example illustrates the point that whenever you read about ‘average,’ especially in the financial media, it’s important to understand what that term means. Without getting into math formulas, average as it is commonly used actually refers to the mean. In the example above, the mean spreads the credit card debt out among all parties in the sample. This leads to a faulty conclusion, namely that we’re all in debt to the tune of thousands of dollars. Looking at the median is also misleading because using that term you’d conclude we’re fine, with zero credit card debt.
My point is that when I read a story, in the financial press especially, I try to look past the sexy headline and into the numbers a little bit.
